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GM's Saab Job

Will a deal with Subaru turn the brand around?

General Motors(NYSE:GM) has to keep trying to turn its struggling Saab unit around, but its current initiative risks diluting the Swedish carmaker's brand.

Saab will reportedly co-develop a second car, a higher-end sedan/sport-utility crossover, with Fuji Heavy Industries' Subaru, in which General Motors controls a 20% stake. Previously, the two brands joined forces to create the recently introduced compact sports car, the Saab 9-2X.

From purely an efficiency standpoint, the move makes some sense. The crossover vehicle will be manufactured by the Japanese automaker at its Lafayette, Ind., plant. That facility soon may have idle capacity -- a contract to produce Isuzu vehicles is scheduled to end later this month. In addition, the collaboration should help speed introduction to the U.S. market.

Nonetheless, the team-up could hurt Saab. At this point it may appear that the only place for the Swedish outfit to go is up. The unit has posted a profit only twice since General Motors acquired it, and sales this year are down considerably, even as GM keeps offering heavy incentives. At least one of the reasons for this seems pretty clear. Saab once held a somewhat unique position in the marketplace as an entry-level luxury vehicle maker. Over the past several years, though, competition in that space has proliferated as Ford(NYSE:F) and DaimlerChrysler(NYSE:DCX) have rolled out cheaper versions of their high-end Jaguar and Mercedes nameplate.

General Motors' solution seems to be to cut costs though alliances with Subaru, but in doing so, it could lose the upwardly mobile crowd now interested in Saab vehicles. After all, much of this group is striving to move up the car food chain to more expensive vehicles, and if the new car ends up being a Subaru in Saab clothing, these folks may be turned off.

Fool contributor Brian Gormanis a freelance writer living in Chicago. He does not own shares of any companies mentioned here.